Page 199 - DMGT551_RETAIL_BUSINESS_ENVIRONMENT

Retail Business Environment

Notes Retailing Functions in distribution

Manufacturers, wholesalers and others are informed about sales forecast, delivery delays,
customer complaints, defective items, inventory turnover, etc. by the retailer

Retailers also complete transaction with customers.
Retailers also provide customer services gift wraping, delivery and installation.
For these reasons goods and services are sold via retail firms not owned by manufactures.
This let the manufacturer (wholesale) reach more customers, reduce cost, increase sales
more rapidly.

Benefits of Intermediaries in Channels of Distribution

If selling from the manufacturer to the consumer were always the most efficient way, there
would be no need for channels of distribution. Intermediaries, however, provide several benefits
to both manufacturers and consumers: improved efficiency, a better assortment of products,
routinization of transactions, and easier searching for goods as well as customers.
The improved efficiency that results from adding intermediaries in the channels of distribution
can easily be grasped with the help of a few examples. In the first example there are 5 manufacturers
and 20 retailers. If each manufacturer sells directly to each retailer, there are 100 contact lines—
one line from each manufacturer to each retailer. The complexity of this distribution arrangement
can be reduced by adding wholesalers as intermediaries between manufacturers and retailers. If
a single wholesaler serves as the intermediary, the number of contacts is reduced from 100 to
25—5 contact lines between the manufacturers and the wholesaler, and 20 contact lines between
the wholesaler and the retailers. Reducing the number of necessary contacts brings more efficiency
into the distribution system by eliminating duplicate efforts in ordering, processing, shipping,
etc.
In terms of efficiency there is an effect of diminishing returns as more intermediaries are added
to the channels of distribution. If, in the example above, there were 3 wholesalers instead of only
1, the number of essential contacts increases to 75: 15 contacts between 5 manufacturers and three
wholesalers, plus 60 contacts between 3 wholesalers and 20 retailers. Of course this example
assumes that each retailer would order from each wholesaler and that each manufacturer would
supply each wholesaler. In fact geographic and other constraints might eliminate some lines of
contact, making the channels of distribution more efficient.
Intermediaries provide a second benefit by bridging the gap between the assortment of goods
and services generated by producers and those in demand from consumers. Manufacturers
typically produce many similar products, while consumers want small quantities of many
different products. In order to smooth the flow of goods and services, intermediaries perform
such functions as sorting, accumulation, allocation, and creating assortments. In sorting,
intermediaries take a supply of different items and sort them into similar groupings, as
exemplified by graded agricultural products. Accumulation means that intermediaries bring
together items from a number of different sources to create a larger supply for their customers.
Intermediaries allocate products by breaking down a homogeneous supply into smaller units
for resale. Finally, they build up an assortment of products to give their customers a wider
selection.
A third benefit provided by intermediaries is that they help reduce the cost of distribution by
making transactions routine. Exchange relationships can be standardized in terms of lot size,
frequency of delivery and payment, and communications. Seller and buyer no longer have to
bargain over every transaction. As transactions become more routine, the costs associated with
those transactions are reduced.

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